It’s time to double down on Latin America

20 Jun 2018

Latin America

Corruption, Fraud and Regulatory Investigations

It’s time to double down on Latin America

Latin America is slowly but steadily catching-up with international anti-corruption enforcement trends. Countries like Colombia, Mexico, Guatemala, Peru, Chile and Argentina are all striving to improve their legal integrity frameworks and address corruption. For both companies in the region that have long turned a blind eye to corruption risks and companies that have avoided investing in Latin America rather than engage with those risks, the time has come for a reappraisal.

Recent strides in the fight against corruption have demonstrated that Latin America is eager to become a more attractive destination for foreign investment from companies in countries with FCPA-type regulations and laws thus avoiding huge, bruising scandals like the Car Wash investigation in Brazil that led to political instability and profound damage to some of Brazil’s biggest companies. While the region has shown its enthusiasm to engage global markets, those in the international community primed to reciprocate with investment into Latin America, should still do their homework before inking deals.

For companies interested in Latin America, this new environment presents a chance to show investors that reputational concerns are coming to the forefront of business and long term market survival. Investors are also increasingly demanding that companies demonstrate social responsibility and include measures to increase transparency and help combat social inequality. Until recently this has been mostly considered a problem only for government to tackle. For example, recently an international telecommunication company successfully job trained demobilized paramilitaries in Colombia to reenter the workforce following the end of Colombia's decades-long civil war to support its compliance education training program.

This means there are golden business opportunities in the region, but only for companies that decide to make compliance a core part of their business strategies. Indeed, it is no small task: it will take compliance teams time and effort to understand new anti-corruption legislation passed in many Latin American countries, and it will take systemic effort to instill a culture of compliance among the workforce. But for companies willing to tackle these challenges in major opening areas, compliance will be a key differentiator, for instance in areas like Brazil’s oil industry in the wake of Odebrecht’s collapse due to the Car Wash investigation. It is important to stress that these opportunities, particularly where contracts with state entities are involved, will come with high levels of exposure and a need for strong due diligence standards, but they can be win-win propositions in the sense that companies can build strong businesses at the same time that they help improve the business integrity environment in countries where corruption has historically distorted the economy.

Why is the new environment positive for honest companies?

For centuries, corruption has been a reality in Latin America and a word all too frequently associated with cultural, structural and endemic citizen behavior. There is no denying that most of Latin America’s countries continue to be considered mid- to high-risk markets. The average score for Latin American countries in the 2017 Transparency International Corruption Perceptions Index (CPI) was 44 out of 100 (For comparison, Asia-Pacific scored 44, and Western Europe scored 66.). However, in the last few years, Latin America has made considerable advances in the fight against corruption despite some recent enforcement setbacks surrounding implementation. If you are an honest company, then these foundations may be great news for you. If not, then you may be losing sleep at night. This positive shift can be attributed to the following factors:

A new regulatory structure that has reached critical mass: This includes so-called “second generation” transparency reforms. In recent years, the region has experienced a solid increase in laws that promote institutional stability, transparency and accountability in the public sector. Only very few countries in the region have failed to step up against the fight against corruption, including but not limited to Ecuador, Panama and not surprising Venezuela. Otherwise, Latin American countries in the past year have generally raised their hands in an effort to regulate and implement policies to fight corruption in the region. These reforms include Mexico’s General Law of Administrative Responsibility, Decree 1352 in Peru, Law 1778 in Colombia, Executive Decree No. 21 in Ecuador, The Brazilian Clean Companies Act, and Argentina’s Law on Corporate Criminal Liability, the last of which expands corporate criminal liability to include bribery in the country or abroad. Also worth mentioning as part of the recent steps to fight corruption has been the incorporation of a few countries into the OECD, Colombia being the latest of these in May of this year. Other countries have gone to even more extreme measures, for example Guatemala who decided to give up on sovereignty in its anti-graft efforts to the UN-sponsored International Commission Against Impunity (CICIG). Since then, the foreign entity has caused the removal from office of an acting president, as well as the imprisonment of several judges and hundreds of public officials.

This goes to show how Latin American countries are not only strengthening their local policies, but have now extended their desire to crack down on corrupt practices by turning to cross-border initiatives such as enforcement by third-party experts (such as CICIG) and using international regulations (such as the anti-corruption convention of the OECD and the FCPA).

Change in patterns of access to information and the rise of social media: The traditional way of accessing information through newspapers, broadcast news and radio has been consistently declining in the region, while access to information through social media has significantly increased. This trend has allowed for two fundamental things to happen: information to circulate faster thus reaching its audience more effectively and cost reductions in organizing collective actions without visible leaders. Citizens now have in their hands the ability to scrutinize companies or individual leaders in real time. Some analysts have called part of this paradigm as a shift the “reign of organized minorities”, thus companies must not only adapt to this new reality but also look for opportunities to gain advantage.

Decreasing tolerance for injustice: Anti-corruption citizen movements are growing in many countries across the region. Success stories against systemic cases of grand corruption have provided a credible story for social movements to call for action. Recent trends have shown that impunity is no longer widespread. Citizens are pushing back demanding that state institutions are more proactive regarding the regulation and supervision of public-private relations. As a result, authorities have started to take the issue more seriously, including making anti-corruption a major part of political candidates’ political agendas.

External enablers: Sherman and Sterling 2017 FCPA digest publication stated that of the total nineteen FCPA global enforcement actions, nine involved alleged acts of bribery in Latin America (Biomet, SQM, Rolls-Royce, Orthofix, Comerma/Beech/Ardila-Rueda, Alere, Baptiste, SBM, and Keppel). This is the result of the significant number of entities in the region currently under investigation (e.g., Petrobras, Odebrecht). Consequently, anti-fraud legislation such as the FCPA and enticing cooperation incentives (including those to whistle-blowers) have helped to increase the focus on fighting fraud and corruption in in the region. For existing business, rather than hitting the panic button, these developments present an opportunity to embrace reality and improve compliance standards.

Exceptional individuals and independence of judicial systems: A new generation of judges, prosecutors and activists are attacking corruption head on, regardless of the powers behind it. Some have even successfully achieved a level of independence from judicial systems that have historically been deeply corrupt. However, the challenge that lies ahead is for the region to move from exceptional individuals to exceptional institutions. In this regard, Brazil is leading the charge, their enforcement agencies are feeling particularly emboldened in the current climate, and it is possible this will migrate to other parts of the region.

Encouraging political environment: The political environment across Latin America is becoming more business friendly. This is a crucial election year in several countries including Colombia, Mexico and Brazil. All candidates and political parties have placed anti-corruption at the center of their agendas as a way to garner votes and increase popularity, although it remains to been seen whether these promises will manifest in true change. We also expect elected candidates to promote structural change and include strong anti-corruption components in their electoral proposals.

As the region continues to evolve, it is imperative for both companies and investors to understand, adapt and adhere to the changing regulatory, political and social landscape as it relates to corruption. The challenges and risks to doing business in Latin America are real; however the potential rewards and opportunities to take advantage of this new paradigm are just as substantial. Stay tuned for part two of this series which explores how companies are navigating the anti-corruption developments taking place across Latin America into a competitive advantage.